Matt Brakey is president of Brakey Energy, a Shaker Heights-based energy consulting firm that works with some of Ohio's largest energy users, providing comprehensive energy management services to commercial and industrial businesses in Ohio and helping companies identify and implement energy-saving measures to reduce energy costs.

Get ready for higher electricity costs.An exponential jump in capacity costs for the 2015-2016 delivery year will significantly increase electricity prices for FirstEnergy Corp.'s Ohio customers. These increases will be so profound that they will drive some commercial and industrial users out of business. Though the implications are enormous, most FirstEnergy-Ohio customers are unaware of these impending costs, and even fewer understand this complex issue.Electricity is different from many commodities because it cannot be economically stored in large quantities. Electricity has no shelf life; it must be produced and consumed simultaneously. For this reason, there must be sufficient generation — enough “capacity” — to produce electricity when demand on the grid is at its peak. If the amount of electricity generated is insufficient to meet demand during these peak times, the lights go out.In order to ensure there is sufficient capacity, all FirstEnergy-Ohio customers pay capacity costs, either directly or indirectly, as a component of their electric bill. Capacity costs have recently constituted a very small portion of electricity costs. At a fraction of a penny per kilowatt-hour it has been easy to discount this relatively minor expense. However, beginning June 1, 2014, capacity costs in FirstEnergy-Ohio territory will increase nearly 700%. Increases become even more pronounced on June 1, 2015, when these costs will increase more than 1700% from current levels.These costs will be crippling to some large commercial and industrial energy users.Capacity costs are determined by periodic auctions run by the wholesale electric market that serves Ohio and many other Midwest states and the East Coast. Under ideal circumstances, each auction would set capacity costs for the entire wholesale market. However, as a result of aggressive Environmental Protection Agency regulations and plummeting prices for natural gas as a competing fuel, several coal-fired power plants in Northern Ohio are retiring. Because these local closures don't impact the entire Midwest/East Coast market, the FirstEnergy-Ohio region was carved out to set its own capacity clearing price — an unprecedented price for the 2015/2016 delivery year.So what's it going to cost your business? In FirstEnergy-Ohio territory, a customer's capacity costs is based on its electric consumption during the five, one-hour intervals of the year when demand on the electric grid is at its highest.Load factor is a useful tool to estimate your capacity costs. Load factor is a measure of electric consumption consistency. It is the ratio of your average hourly electric consumption to your highest hourly peak usage over a billing period.As an extreme example, a 100% load factor indicates that a customer's electrical draw remains constant every hour of every day throughout the billing period. An example of a high load factor customer is a manufacturing plant that runs three shifts, seven days a week.In comparison, a low load factor customer has tremendous variance in its electrical draw throughout the billing period. An example of a low load factor customer is a bank that is only open eight hours a day, five days a week.In very general terms, the lower a customer's load factor, the more increased capacity costs impact their electric bill. But load factor is only a reliable indicator if your highest hourly peak usage coincides with the grid's peaks. It works better for a manufacturer who uses the most power during the day, and especially during times such as hot summer afternoons, but would not be a reliable tool for a company that ran its machines only at night.If a customers peak usage does not coincide with the grid's peak demand, an evaluation based on the customer's load factor will likely overestimate its capacity costs – sometimes significantly so. Detailed analysis of your historical consumption is required for more precise estimates.At Brakey Energy, we use load factor to estimate the retail capacity costs for FirstEnergy-Ohio customers in cents per kilowatt-hour (kWh) for the 2011/2012 through 2015/2016 delivery years. For many customers with load factors less than 40%, capacity costs could easily meet or exceed the current base price of electricity. We think these rising costs are going to have real effects on local businesses, especially those that don't prepare now.High capacity costs for the 2015/2016 delivery year will significantly impact electricity prices for most customers in FirstEnergy-Ohio territory. The consequences for many businesses will be dire. Even though these facilities could take relatively simple steps to shield themselves from the bulk of these costs — by increasing their efficiency or monitoring and changing their peak usage patterns — many will not. As a result, some of these companies will be forced to close their doors. If your organization is in FirstEnergy-Ohio territory, you must become knowledgeable about capacity costs. By identifying how and when you presently consume electricity, you can take proactive steps that will significantly reduce your future capacity costs. Brakey Energy has a free, publicly available white paper with more details, which you can find on our website, www.brakeyenergy.com.

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